Why Does Manufacturing Matter? Which Manufacturing Matters? A Policy Framework Susan Helper, Timothy Krueger, and Howard Wial1 “ Public policy is needed to Summary Manufacturing matters to the United States because it provides high-wage jobs, commercial help strengthen innovation (the nation’s largest source), a key to trade deficit reduction, and a disproportionately large contribution to environmental sustainability. The manufacturing industries and firms that manufacturing make the greatest contribution to these four objectives are also those that have the greatest potential to maintain or expand employment in the United States. Computers and electron- and promote ics, chemicals (including pharmaceuticals), transportation equipment (including aerospace and motor vehicles and parts), and machinery are especially important. a high-wage, Productivity and wages vary greatly within as well as between industries. In any industry, manufacturers that are not already at the top have room to improve their performance by adopt- innovative, ing “high-road” production, in which skilled workers make innovative products that provide value for consumers and profits for owners. export- American manufacturing will not realize its potential automatically. While U.S. manufacturing performs well compared to the rest of the U.S. economy, it performs poorly compared to manu- intensive, and facturing in other high-wage countries. American manufacturing needs strengthening in four key areas: environmentally n Research and development. n Lifelong training of workers at all levels. sustainable n Improved access to finance. n An increased role for workers and communities in creating and sharing in the gains from manufacturing innovative manufacturing. These problems can be solved with the help of public policies that do the following: base.” n Promote high-road production. n Include a mix of policies that operate at the level of the entire economy, individual indus- tries, and individual manufacturers. n Encourage workers, employers, unions, and government to share responsibility for improv- ing the nation’s manufacturing base and to share in the gains from such improvements. BROOKINGS | February 2012 1 Introduction he United States lost 41 percent of its manufacturing jobs between June 1979, when manu- facturing employment peaked and December 2009, when it reached its recent low point.2 The last decade saw the most severe manufacturing job losses in U.S. history. Manufactur- ing’s share of total employment fell from 13.2 percent in January 2000 to 8.9 percent in TDecember 2009.3 During the last two years there have been some positive signs for manufacturing. The number of manufacturing jobs increased by 2.6 percent from December 2009 through September 2011, and these gains were concentrated in durable goods manufacturing, which is generally the higher-wage, more productive part of manufacturing.4 In addition, between 2009 and 2010 manufacturing output grew at more than double the rate of GDP. However, the recent manufacturing job gains pale in compari- son to the losses since 2000; at the rate of manufacturing job growth that the nation has seen since December 2009, it would take until 2037 for the nation to regain all the manufacturing jobs it lost between January 2000 and December 2009.5 Moreover, inflation-adjusted hourly wages in manufac- turing fell between December 2009 and September 2011, even as manufacturing employment was growing. Manufacturing wages declined more rapidly than wages in the private sector as a whole.6 Thus, even if recent job growth continues, all is not well with American manufacturing. There has recently been renewed debate over whether, as Stephen Cohen and John Zysman argued in their 1987 classic, “manufacturing matters” to the U.S. economy.7 In the current debate, some argue that manufacturing job loss should not be a public policy concern because it results from rapid productivity growth, which is good for the national economy.8 Others contend that there is nothing special about manufacturing because many service industries can be just as productive and innova- tive as manufacturing.9 A final argument against a renewed policy focus on manufacturing is that U.S. manufacturing wages are too high for manufacturing to be internationally competitive.10 On the other side of the debate are those who argue that manufacturing is a crucial source of high-wage jobs and innovation and is essential if the United States is to reduce its trade deficit, maintain a strong national defense, and have a thriving service sector.11 This report argues that manufacturing does indeed matter to the U.S. economy and that public policy can strengthen American manufacturing. The nation need not and should not passively accept the decline or stagnation of manufacturing jobs, wages, or production. American manufacturing mat- ters because it makes crucial contributions to four important national goals. ➤ Manufacturing provides high-wage jobs, especially for workers who would otherwise earn the low- est wages. ➤ Manufacturing is the major source of commercial innovation and is essential for innovation in the service sector. ➤ Manufacturing can make a major contribution to reducing the nation’s trade deficit. ➤ Manufacturing makes a disproportionately large contribution to environmental sustainability.12 This report provides new and detailed evidence in support of these arguments. The report also rebuts each of the main arguments made by those who say that the United States should allow its manufacturing sector to shrink. It shows that U.S. manufacturing job losses are not due primarily to rapid productivity growth in manufacturing. Although some service industries are highly productive and innovative, only a small share of non-manufacturing employment is more pro- ductive or innovative than the manufacturing average. Finally, American manufacturing wages are not too high for U.S. manufacturers to be internationally competitive. Unlike other reports, this report not only explains the important public purposes that manufacturing serves (“why manufacturing matters”), but also “which manufacturing matters”: which kinds of manu- facturing jobs the nation has the greatest potential to retain or grow and which kinds of manufactur- ing firms are most likely to prosper in a way that promotes high wages, innovation, more balanced international trade, and a better environment. This report shows: ➤ The industries and firms that support the four national goals identified in this report are also those that have the greatest potential to maintain or expand employment in the United States. Computers and electronics, chemicals (including pharmaceuticals), transportation equipment (including aerospace and motor vehicles and parts), and machinery are especially important for 2 BROOKINGS | February 2012 their contributions to the four national goals and their job-retention or job-creation potential. ➤ There is dramatic variation in productivity and wages among firms in the same industry as well as between industries. Thus, even within industries that have low productivity and wages on average, firms that are not already at the top have room to improve their performance. They can do so by adopting a “high-road” production recipe, in which skilled workers make innovative products that provide value for consumers and profits for owners. American manufacturing will not realize its potential automatically, however. While U.S. manu- facturing performs well compared to the rest of the U.S. economy, it performs poorly compared to manufacturing in other high-wage countries. U.S. manufacturing wages are relatively low by interna- tional standards, the American edge in innovation and renewable energy manufacturing is slipping, and manufacturing runs a huge trade deficit (rather than a surplus, as in many other high-wage countries). Public policy is needed to help strengthen manufacturing and promote a high-wage, inno- vative, export-intensive, and environmentally sustainable manufacturing base. Unlike other Brookings work on manufacturing policy, this report does not suggest particular poli- cies but frames the terms within which manufacturing policy should be designed.13 To achieve the national goals that this report emphasizes, American manufacturing needs strengthening in four key areas: ➤ Research and development, including that needed to solve problems common to a variety of manufacturing processes, not just that needed to develop “breakthrough” products. ➤ Lifelong training of workers at all levels, so that they are equipped to collaborate in designing and implementing innovative products and processes. ➤ Improved access to finance for firms wishing to make productive investments. ➤ Mechanisms that increase the role of workers and communities in creating and sharing in the gains from innovative manufacturing. These problems can be solved with the help of public policies that do the following: ➤ Promote “high-road production,” in which firms harness the knowledge of all their workers to create innovative products and processes. ➤ Include a mix of policies that operate at the level of the entire economy, individual industries, and individual manufacturers. ➤ Encourage workers, employers, unions, and government to share responsibility for improving the nation’s manufacturing base and to share in the gains from such improvements. Our policy framework is unabashedly but not uncritically pro-manufacturing. Manufacturing mat- ters for public policy because it serves important